Crowdfunding: A help or hindrance?

Digital technology is changing the way entrepreneurs and new products get funded. But is crowdfunding — today’s best-known and most-hyped finding tool — the best way to go?

At a recent conference at the University of Toronto’s Rotman School of Management, a wide range of experts discussed today’s financial channels, and what surprises the future is likely to bring. Here’s your hacker’s guide to some of their points of view.

Entrepreneur Ben Grynol of Winnipeg-based Top & Derby, an online purveyor of designer walking canes, described his company’s experience with crowdfunding. Last April, Top & Derby set out to raise US$20,000 in a month-long campaign on the crowdfunding platform Indiegogo. It was a merch-for-cash deal typical of the period: backers who pledged US$70 to the company would receive a free cane. For US$200, you got three canes. For US$25, you got a set of coasters.

Top & Derby raised US$22,000 from buyers in nine countries. The campaign generated lots of media coverage and global awareness, but more to the point, Grynol said, “The campaign was great proof-of-concept for us.” After spending a minimal amount to produce a “minimal viable product,” it proved people would buy their aesthetic-oriented products. That finding motivated the company’s three founders to invest more funds in their project, and they are now looking at creating new design-influenced healthcare products.

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Grynol says his company learned four key lessons about making crowdfunding work.

Establish partnerships Know who is going to produce the product for you.

Get firm quotes from suppliers “so the economics of the campaign are not compromised.” Otherwise, suppliers who know you are obligated to fulfill these orders may suddenly tell you their prices have doubled.

Set a realistic funding goal “It’s better to exceed a low goal than miss a high goal.”

Use accurate timelines It takes six to 12 months to plan a crowdfunding campaign, and then additional time to contract production and ship, Grynol said. “Most [crowdfunding] companies that get funded miss their deadlines.”

Rotman professor Ajay Agrawal, the conference moderator, put crowdfunding in its place by comparing two prominent case studies. You’ve probably heard of the Pebble Watch, a product that was launched on Kickstarter in a campaign designed to raise US$100,000. Backers were offered a watch, when it became available, for US$115 — a discount from the anticipated retail price of US$150. The company raised its US$100,000 in an hour. By the end of the month the company was limiting pre-orders. In total, it raised US$10.3-million from 68,928 early adopters.

Contrast that to Thalmic Labs, the Waterloo, Ont.-based company whose Myo armband lets you use the movements of your hands to effortlessly control your phone, computer or video games. Graduating from the University of Toronto’s Creative Destruction Lab, an accelerator for high-expectation growth firms, Thalmic raised US$1-million from early investors a year ago. Six months later, it raised another US$15-million in venture capital that gave its early backers a sevenfold profit, on paper. What made the difference? It wasn’t crowdfunding.

Instead, said Agrawal, Thalmic took to the Web and used PR, blogs and social media to promote pre-sales of its armbands at $149 each. Within 24 hours, revenue reached $100,000; in all, it pre-sold 30,000 units. That $4.5-million demonstration of market clout brought the venture capitalists to the table. And, Agrawal says, the company didn’t have to worry about reporting back constantly to “the crowd” on the company’s progress. “The crowd comes at a cost,” he says.

Rotman marketing prof Avi Goldfarb examined who gets what out of crowdfunding. Clearly, entrepreneurs get access to capital and increased awareness; but what do the backers get? Goldfarb said funders get access to new investments they might not otherwise discover: “Global rather than local equals more opportunities.” He said crowdfunding opens up early-stage investing to non-accredited investors who are normally shut out of this kind of risky business. And he noted that many backers seek the “cool” factor that comes with being first on your block to get a Myo or Pebble. “Funders like to be perceived as ‘first.’ ”

From Silicon Valley via Skype, Kevin Laws, chief operating officer of AngelList, a former blog that has morphed into a ground-breaking matchmaker for startups and investors, described how AngelList, taking advantage of the financial deregulation encouraged by the JOBS Act, is finding new ways to help companies find early-stage backers — and vice versa.

AngelList has just begun creating new “syndicates” that allow non-accredited investors to invest in the same companies as market-leading VCs, who act as “syndicate leads.” Companies get the advantage of smart money plus the clout of the crowd, while the “leads” receive an additional percentage of the profits for the guidance they provide to the company founders.

So when will this wave of securities innovation reach Canada? James Turner, vice-chair of the Ontario Securities Commission, reassured the room that new crowdfunding rules are coming soon — rules he expects will be accepted by other financial regulators across Canada. To help more companies cross the funding gap, he said the rules on investments by “friends and family” are also under review.

The OSC is proceeding cautiously, he said, for fear of fraud and potential abuse. The most likely solution will be to limit the amount of adventure capital an individual can invest at any time. “We are looking at new rules, but not abandoning our principles,” Turner said.

In a survey of 1,500 investors, Turner said, the OSC found that a majority wanted nothing to do with crowdfunding. “They thought it was very high-risk. But a core are very interested in having the opportunity to do it.”